How Much Debt is Too Much?

3d rendering of padlocked credit card

Reprinted courtesy of SavvyMoney.

by Jean Chatzky

There’s a lid on the amount of debt you can comfortably take on, generally tied to your income. Too much, and you’ll quickly find yourself in a bind. Here’s how to land on your sweet spot.

Some food for thought:

As of September of this year, the average amount of student loan debt was $29,939; for credit card debt, that number was $6,513. And as for home mortgage loans? $174,137 per household.

Depending on how your finances compare to the above figures — average, above average, or (and I hope this is the case) below average—you may be wondering, “Is this too much debt?”

Generally speaking, the less debt you have, the better. The money you’re now putting toward your credit cards or other debts could be used for retirement savings, an emergency fund or your child’s education. Still, some debt isn’t bad. In fact, unless you paid for your house and car in cash, a little bit of debt is unavoidable.

And there is, for the record, good debt. It gets you something important—that roof over your head, the car you drive back and forth to work and a college education. You can usually discern it from bad debt (the kind that gets you things you don’t actually need) because the interest rate will be lower and often tax deductible.¹

The key is to consider your debt-to-income ratio—that is, the percentage of your income that you have in debt.

As a general rule, your total debts (excluding mortgage) should be no more than 10 to 15% of your take-home pay (meaning, after you take out taxes and the like). If you’re not likely to incur any additional debt or unexpected expenses, you may be able to handle upward of 20%. Including your mortgage, your debt level should exceed no more than 36% of your take-home pay.

Why 36%? I didn’t pull that number out of a hat, I promise. Your debt-to-income ratio (DTI) is actually a pretty important number—sometimes it’s as important as your credit score. Lenders look at the ratio when trying to decide if they should lend you money or extend credit. A DTI of 36 or lower shows that you have a good balance between your debt and income and that — this is what is most important to lenders—you can handle your monthly loan payments.

You can calculate your DTI with a pen and paper (or, for the mathematically averse, a calculator). First, add up all of your monthly debt obligations: your mortgage, home equity loan payments, car loans, student loans, the minimum monthly payments on your credit cards, and any other loans you may have. Divide this sum by your gross monthly income, and voila—you’ll have your DTI.

If your debt load is higher than 36% of your take-home pay, now is the time to consider paying down the debt if you’re not already doing so. Cut back on your spending or look for ways to reduce your expenses. With mortgage rates at record lows,  the first thing you should do is consider refinancing. And don’t stop with your house — you can refinance your auto loan to a lower rate, too, and it only takes about 15 minutes.

And even if your debt load is low, remember: there may be better ways to use that money. My advice? No matter how much debt you’re carrying right now, pay it down —and then once it’s gone, take those payments and start directing them towards your savings.



1 SFFCU does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.


When you click on external links, you are linking to alternate websites not operated by SchoolsFirst FCU, and SchoolsFirst FCU is not responsible for the content of the alternate websites. The fact that there is a link from SchoolsFirst FCU’s email to an alternate website does not constitute endorsement of any product, service, or organization. SchoolsFirst FCU does not represent either you or the website operator if you enter into a transaction. Privacy and security policies may differ from those practiced by SchoolsFirst FCU, and you should review the alternate website’s policies.

Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.

If you post a comment, we will make every effort to respond or contact you directly. We reserve the right to delete comments that contain personal information, unauthorized content, or are generally inappropriate.

Leave a Reply

Your email address will not be published. Required fields are marked *